Sunday, May 31, 2009

The Credit-Free Diary

Consumers and banks alike are moving rapidly away from credit cards. If this trend continues, within 5 years, there may be no credit cards left. What would life be like if credit cards disappeared, or, to quote Ellen DeGeneres, without a credit card, “How do you do anything?”

The debit card is part of the answer, of course, but to get a handle on how big a change we’re considering, I will attempt to get through the month of June without using a credit card or a debit card. I won’t be going so far as to leave my credit cards at home, because I have a feeling that there are whole areas of commerce that won’t recognize a person without a payment card. At the end of the month, and several times along the way, I’ll let you know how it works out.

There are some failures to announce in advance. My communications accounts (telephone, Internet access, and the like) are billed automatically to my credit card once a month or once a year. I don’t want to risk experimenting with those accounts, as the communications business is in even more tenuous condition than the credit card business. Besides, the automatic payments question, while important, is somewhat removed from what I’m trying to find out here.

Even without credit card transactions, I am not exactly credit-free. I owe a bank about a third of the value of my home, and I’m promising to pay that off over the next 27 years. Many people like to think of their home payments as a completely different world from credit cards, but it isn’t really separate. If I can cut my credit card spending, perhaps I can pay off my home that much faster.

This afternoon, to get started, I paid off all my credit cards. I found that I had balances on three cards. It took 11 minutes on cycle through all the credit card web sites and submit payments of $346. When those payments process tomorrow, I will have a credit card balance of zero. One of the transactions I paid for was for a music download. The next time I want to download music, how will I pay for it?

Saturday, May 30, 2009

No-Cost Boosts for the Personal Energy Economy

The government economic recovery programs are valuable in buying essential government services at a huge discount, but they will not by themselves create an economic recovery. We ultimately cannot improve the money economy just by moving the money around. Every gain from economic stimulus, where the money is moved to, comes with a cost, where the money is moved from. The money economy needs an influx of fresh energy, and it must come mostly from what I call the personal energy economy.

This is tricky too because we are used to spending money to boost our personal energy. Medical treatment, entertainment, and travel are examples of services that, done right, boost people’s energy, but they cost money. But there are also ways to boost energy that don’t cost money, and we need to rely a little more on these now to give the economy a boost. You can boost your own personal energy without spending money by doing things such as:

  1. rest
  2. breathe
  3. run
  4. cook
  5. listen
  6. dance
  7. study
  8. explore
  9. remember
  10. meditate

None of these automatically boost your energy, but you know how to do them in a way that will, so do them that way, and add some energy to your life — especially if you have spare time on your hands. Some of the extra energy will spill over into the money economy, and after enough of us do this kind of thing, the money economy will start to turn around.

Friday, May 29, 2009

This Week in Bank Failures

One of the reasons BankUnited failed in Florida last week was that it paid too much in interest. It’s a well-known pattern, going back at least to the 19th century, that banks that are financially weak may think to offer especially high interest rates to attract more depositors and build a stronger deposit base. Yet the high interest payments weaken the bank’s financial position further. This quickly becomes a downward spiral and in the worst case can become a Ponzi scheme, if the bank becomes so weak that it becomes impossible to pay back all the depositors. BankUnited in the end was uncomfortably close to this outcome, and that was one of the reasons it had to be closed down.

High interest rates on deposits are a red flag for banking regulators, and the FDIC specifically prohibits them for banks that are in a weak capital position. The FDIC tightened this rule today. Starting next year, banks that don’t have enough capital will essentially be prohibited from paying above-average interest rates. These rules affect only banks that are “less than well capitalized,” currently about 1 bank in 33.

The limitation on deposit interest rates reduces the competition between banks and should make banks generally more profitable, at least in theory. In specific communities, the rule could prevent a poorly capitalized bank from drawing deposits away from a healthy bank and perhaps causing both banks to fail. Instead, a struggling bank is forced to find ways to improve its operations and make a profit in order to improve its financial condition.

The Quarterly Banking Profile released this week by the FDIC did not seem to depict an industry in crisis when you look at the financial aggregates, but the loan portfolio is another matter. The percent of distressed loans is the highest it has ever been in the 25 years the FDIC has been keeping these statistics. Less than three years ago, the percent of distressed loans was at historic lows, but since then, the quality of bank loans has deteriorated at the fastest pace ever recorded.

This is one of the reasons the banks are shrinking. Banks are not making quite so many new loans, and the number of people working in banking is 4.4 percent less than a year ago.

Thursday, May 28, 2009

The Fly Swatter Saga

Some things are such a regular part of life that you think you can just go out and buy one if you need it. But I couldn’t buy a fly swatter for any amount of money — not at any supermarket I went to, not at a drug store, not at a discount store, not at a hardware store.

In case you’re in the same predicament, I’ll tell you where I finally found one: in Walmart, at the back of the grocery section, in the cleaning supplies, on the top shelf in a display of insecticides. The price, 92 cents for a 2-pack, tells me that the store was making a pretty healthy markup.

This isn’t the first time I’ve gone out to buy a common item only to find that it is no longer common in stores. If you want to buy a single-line, plug-in telephone, you might find yourself driving all over town too. Ditto for a basic, mid-quality computer scanner. Or a pair of shoelaces.

How can common household items become hard to get? How does the search for a fly swatter turn into a saga? It’s easier to understand when you look at the marketing side of the retail process. Everyone who gets trained in marketing is taught that they need to have an angle to get ahead of the competition, or what’s called a Unique Selling Proposition, or USP. Business experts tell how important it is to dazzle, surprise, and delight your customers. And the biggest marketing concept in the past century is upsell, a nice short word for steering customers toward big-ticket high-markup items so you can rake in the big bucks. As long as businesses believe in upsell, the big-ticket value-added items will never disappear from the shelves — there is no problem getting a four-line telephone, or a telephone with a digital answering machine built in. But the item you really want, the basic, no-frills telephone, won’t thrill you, isn’t unique in any way, and sells at a low price, so retailers decide not to carry it at all.

Of course, it is a problem for a retailer whenever customers go away disappointed at the gaps in the merchandising. When a supermarket decides to stop selling yeast, the 99 percent of customers who don’t make bread may not even notice, but for the 1 percent who do, it weakens their idea of the store as a place where they can buy food. They become more alert to alternatives, which makes them more likely to visit the competitors. If I had found a fly swatter in any of the first 15 stores I visited, I wouldn’t have had a reason to go into Walmart.

The irony, of course, is that these common, familiar items are disappearing from retail even as the United States has an embarrassing amount of retail activity. There are more unique items than ever at retail, spread out across billions of square feet. When common items that people want are suddenly not sold in stores, it represents a peculiar kind of breakdown. Retailers are competing so hard that they’re forgetting to compete.

Wednesday, May 27, 2009

Why Maria Bartiromo Doesn’t Have a Credit Card

As another indication of the way credit cards and debit cards have flipped, here is a TV segment from January in which CNBC anchor Maria Bartiromo explains to Ellen DeGeneres why she doesn’t have a credit card. Ellen asks the obvious question, “How do you do anything?” (The credit card discussion starts at 6:37.)

The money quote: “But if you’re gonna load up on debt on your credit card, I am just so not of that mindset.”

This revelation made headlines at the time (though I somehow missed it until today). I have seen two main reactions to the story. Some people are surprised at the thought of a Wall Street honcho who doesn’t carry a credit card — isn’t a credit card supposed to be a sign of success? Others gripe that you have to be rich to get by without a credit card. There is an element of aspiration in this second point of view: I may have a credit card now, it says, but someday I could be successful enough to ditch it.

I think there is a connection between success and the lack of a credit card, but I focus more on the reverse connection. Success comes, in part, from simplifying life by doing things such as not carrying a credit card. To anyone who is hoping to become successful enough to get out of debt, I would suggest trying to find a way to reverse that: get out of debt so that you can become successful.

Tuesday, May 26, 2009

GM’s Parts Problem

Lawyers are predicting that the General Motors bankruptcy, expected to be filed June 4 in New York, will be the most complicated legal case ever. The case has not been filed yet, and it is already hitting a snag.

The problem is that Delphi, GM’s largest supplier, is already in bankruptcy, and has been since 2005. Delphi missed a deadline last week to offer a plan to emerge from bankruptcy. If a solution is not found for Delphi, it could be put into liquidation as early as next week.

And that would turn GM’s restructuring plan on its head. The plan is to split off its “viable” businesses in order to keep them going. Yet the business segments that GM has identified as viable are the same ones that would be hit hardest by a Delphi shutdown. Every single vehicle at Chevrolet and Cadillac would need adjustments in its engineering design to use alternate parts. If GM approached this challenge in its usual bureaucratic fashion, its factories could sit idle until 2012.

As serious as that sounds, Delphi is so far down the list of problems at GM that it could not really focus on the problems at its largest supplier until the court deadline had already been missed. GM was, for example, trying to work out a deal with its bondholders. That won’t be a problem in bankruptcy court, where the rules of bankruptcy will likely dictate that bondholders get nothing at all, but even in bankruptcy GM cannot avoid its parts problem.

That’s because GM has to prove to the bankruptcy court that it can be a going concern, that it can compete with other automakers. If it cannot show this, the court is obliged to have it liquidated. And in the long run, the main thing that keeps GM from being competitive is its attitude toward parts. GM uses far too many custom parts, and endures the resulting errors and costs, because it does not fully recognize the costs and risks of custom parts when it draws up its designs. Delphi’s bankruptcy is not really the result of accounting fraud, but of the hidden costs of the custom parts that its biggest customers, GM most of all, insist on.

This is a problem that GM has barely touched on in its reorganization plans, yet GM’s continuing operations — and those of Delphi — ultimately depend on reaching some kind of solution in this area.

Monday, May 25, 2009

The Instant Nostalgia Test

As an exercise in instant nostalgia, think back three months, to February 2009. President Barack Obama had just taken office in the middle of the worst recession in a lifetime. One of the biggest consumer electronics chains was liquidating and closing all its stores. Millions of people lost their jobs that month. Two of the big three U.S. automakers were struggling to write real business plans for the first time in an effort to avoid bankruptcy. And one of the hottest political topics was . . .

Well, just about the biggest controversy in Washington in February 2009 was the digital broadcast television transition. Some folks said, let it go ahead as scheduled on February 17. Others said no, that’s much too soon, we have to put it off till June 12 to give viewers more time. And they argued and bickered for weeks until they finally came up with a compromise.

Wow. You look at all the things that Washington is struggling with this month, and it’s hard to believe that the exact timing of a technical change in television broadcasting was the big draw-the-line-in-the-sand moment of three months ago. And that’s one way to measure how much tougher things have become economically. It’s one thing to look at the 8 million people who have lost their jobs between then and now, or the 1 percent decline in GDP, but when you look at the changes in the public agenda and see how much more serious and sober we’ve become about the things we focus on, that’s when you can say, “Yeah, things have really changed.”

Sunday, May 24, 2009

Major Northeast Earthquake

Earthquakes happen every day. On Thursday, an earthquake damaged buildings in China. On Friday, Mexico City felt a moderate earthquake that knocked out electricity in some areas. Yesterday, minor earthquakes hit central Alaska and the California desert. Today, a more powerful earthquake hit a more remote area, an archipelago northeast of New Zealand.

Major earthquakes are less frequent, but we know they’re coming, we just don’t exactly when. Where I live in Pennsylvania and across the northeast United States, we expect about one major quake every 500 years. That means, as far as I know, there is about a one in a million chance that it will hit in the next four hours. We tend to say “one in a million” as a way of saying “not gonna happen,” but it sounds more significant if I say that there is something approaching a 1 percent chance that I eventually die in a major northeast earthquake. It’s still unlikely, but perhaps worth thinking about.

One of the concerns about a major northeast earthquake is the tectonic structure of the northeast. It’s more solid, and that means that instead of affecting just three or four counties, like a California earthquake, it could hit fifteen states simultaneously. The potential for widespread damage makes a northeast earthquake financially more significant. It could wipe out 100 banks if borrowers are disabled, employment centers shut down, and real estate destroyed, so that bank loans cannot be repaid. The northeast is such an important region that it could bring down companies that operate nationally. Life insurance companies could be wiped out along with health insurance companies. And all at the same time that the electrical grid and pipelines might be shut down by damage in multiple places.

Insurance companies know about the financial risk of earthquakes, and I believe they exclude earthquake damage from most building, automobile, and travel accident insurance, but it isn’t easy to remove indirect earthquake costs from other kinds of insurance. For example, fire insurance could not easily exclude damage from the fires that follow earthquakes.

So the possibility of a major northeast earthquake represents a systemic risk to the U.S. financial system. The size of the financial damage would depend on the scale of the physical damage. Some of this risk could be reduced by rewriting the terms of some contracts. But fundamentally, we need to improve the quality of buildings and bridges across the northeast so that an earthquake will not result in so much damage and loss.

Earthquake resistance wasn’t a concept in Pennsylvania buildings until the 1960s, and even now, it isn’t always taken seriously. Meanwhile, most buildings are older than that. And bridges? The state is replacing the oldest bridges one by one, but not always getting to them before they fall down on their own. A few of these bridges are set to be rebuilt this year and next using the transportation funding included in the economic recovery bill. But there is a lot more that could be done to make Pennsylvania and the rest of the northeast more ready to withstand a major earthquake.

Saturday, May 23, 2009

Time for a Constitutional Convention?

In U.S. politics, anything could happen.

That seems to be the best argument anyone can make right now for the continued relevance of the Republican Party. Anything could happen, therefore the national Republican Party could pull itself together and go back to work.

The logic is absolutely unassailable. And yet, if anything could happen, there are quite a few other things that are far more likely than the Republican Party bouncing back. For example, the United States could give itself a whole new constitution.

I know that sounds extremely unlikely, but it is far more likely now than it has been at any point in my lifetime.

That’s because several prominent Republican leaders have been voicing dissatisfaction with some of the core principles written into the U.S. Constitution. For once, it is not the amendments they are unhappy about, but principles written into the original constitution 222 years ago. The Republican governor of Texas has loudly declared that his state may secede from the United States if some of these constitutional principles aren’t soon overturned, and he isn’t the only Republican talking about overturning the constitution. So far, I haven’t heard anyone call for a constitutional convention, but there is a movement in California to have one for that state, to fix its broken budget process. Elsewhere, constitutional conventions have been suggested this week in both the United Kingdom and the Philippines. Perhaps these are signs that constitution-writing is in the air.

Politically, it would have to be a Republican state legislature to start the call for a new constitutional convention. It could be meant as a sincere request or as a gesture of defiance; it scarcely matters. Then 33 more states would have to follow suit. If Republicans get the ball rolling, Democrats might well go along with it. After all, the current system heavily favors the Republicans, giving Democrats only a bare working majority in Washington, even though Democrats outnumber Republicans almost 2 to 1. For a decade, Republicans held a so-called “permanent majority” in spite of being regularly outnumbered and outvoted by Democratic voters. At a constitutional convention now, though, Democrats would dominate just by sheer numbers.

At a constitutional convention, basically anything goes. With few restrictions, it could throw out the old constitution and write a new one, provided that the changes are agreed to by 38 states. But the ratification process normally takes years. Supposing the deadline for ratification is 2020, it is quite possible that the new constitution could be ratified by Democratic states only. There could easily be 40 Democratic states by then. This prospect makes it far more likely that if a broad agreement can be formed at the convention, it can be ratified by the states.

None of this is likely, of course, simply because there isn’t any overarching problem that a constitutional convention could solve. But that too could change. So the next time you hear someone say that “anything could happen” in U.S. politics, remember that a constitutional convention is one of those things that could happen.

Friday, May 22, 2009

This Week in Bank Failures

I wrote about the biggest bank failure of the year so far last night. Florida-based BankUnited failed and was taken over by a Wall Street investment consortium, which will be keeping the BankUnited name.

AIG announced that its CEO will be stepping down as soon as a replacement can be found. Edward Liddy was recruited last fall to stabilize the insurance company after its financial collapse. His departure apparently signals the beginning of the liquidation phase for what was previously the largest insurance company in the world. AIG is hoping to spin off or sell its insurance units so that they will not have to use the tainted AIG name nor participate in its likely bankruptcy. But even with new names, the insurance operations cannot expect to regain the customers they have lost over the past year. Although most of AIG’s employees work in insurance, the company’s fortunes were ruined by its trillion-dollar gambles in the banking business, involving guarantees of bank loan derivatives and similar financial instruments.

There were two more bank failures of significant size tonight, both in Illinois, along with new developments in deposit insurance.

Strategic Capital Bank and Citizens National Bank each had roughly half a billion dollars in assets. The FDIC estimates combined costs of $279 million for the two closures.

Strategic Capital Bank was founded in 1999 and had its one office in Champaign, a small city in east central Illinois. The bank had been operating under a cease-and-desist order since August, and three executives had departed during that time. It had been roughly breaking even in recent quarters, but regulators apparently felt that it had little chance of raising capital or making a profit over the next year or two.

Midland States Bank is taking over the deposits and nearly all the assets of Strategic Capital Bank, with the FDIC providing partial loss protection on most of the assets. Midland States Bank is a commercial bank operating mostly in west central Illinois, near St. Louis, Missouri. It recently acquired Commercial State Bank, but has had considerable difficulty integrating the Commercial State Bank customers into its operations.

Citizens National Bank had several offices in the the area west of Peoria, Illinois. It was founded in Macomb, Illinois, in 1890, and had been managed by members of the same family for its entire history, but was sold to new owners three years ago. It should not be confused with the many other banks that use the Citizens name.

Morton Community Bank, based in the Peoria suburb of Morton, is acquiring half the deposits and purchasing 55 percent of the assets of Citizens National Bank, with the FDIC providing partial loss protection on most of the assets. The other half of the deposits are brokered deposits, and the FDIC will pay those amounts directly to the brokers involved.

Morton Community Bank had two dozen branches already, with the branches outside of Morton operating under other names to emphasize the bank’s local character. The new branches it acquired tonight allow it to extend its territory to the west.

There were two significant events at the FDIC this week. An act of Congress, signed by the President on Wednesday, continues the expanded deposit insurance through 2013. Under the temporary expanded deposit insurance, deposits are insured up to $250,000 per depositor, rather than the usual $100,000. The extension does not apply to the temporary unlimited deposit insurance for non-interest bearing accounts, which expires at the end of this year.

Today, the FDIC announced the final form of its special assessment coming this summer, which will be:

five basis points on each FDIC-insured depository institution's assets, minus its Tier 1 capital, as of June 30, 2009.

Previously, the FDIC had proposed a special assessment of 20 basis points on deposits. The decision to assess assets rather than deposits was based on the recognition that banks’s high-risk loans, which are the source of most of the stress in the banking system, are more related to a bank’s assets than its deposits. The revised special assessment will result in about the same level of assessment at the largest banks, but more traditional banks, including most smaller and community banks will pay much less. That’s because at traditional banks there is a more direct connection between the amount of a bank’s deposits and the size of its assets.

The special assessment is a lot for banks to pay all at once, but probably not enough to keep the Deposit Insurance Fund from running out of money. The FDIC will almost certainly have to begin borrowing money from the Treasury later this year. Congress has authorized a large line of credit for the FDIC, but seems ready to expand that at the drop of a hat if need be.

Thursday, May 21, 2009


It wasn’t a case of Wall Street rushing to the FDIC’s rescue. The BankUnited failure will still cost the Deposit Insurance Fund about $5 billion. But at least the FDIC will not have to shut down all the branches and write checks to a million depositors.

BankUnited was the largest bank based in Florida, with $12.8 billion in assets, $8.6 billion in deposits, and 86 offices. Based on its net worth, though, it was the smallest bank in Florida, with a net worth that had been in negative territory for months. It is being acquired by a Wall Street investment group setting up a new bank for the purpose, which will also be called BankUnited. The new owners are putting in $900 million in new capital. It is not clear that the new capital will be enough for a bank that was recently estimated to be $1.4 billion in the hole, but the FDIC has concluded that letting them give it a try would be less costly than winding down the bank’s operations.

It is somewhat unusual for outside investors to take over a failed bank, but the FDIC hopes it can repeat this process, and promises to publish guidelines later this year so that potential investors will know what to expect. The FDIC has overseen 34 bank failures already this year, and many of the banks that were financially strong enough to acquire a struggling or failed bank have already done so.

Some of the bidders in the investment consortium had previously been reported to be bidding against each other, so it may be that the winning bid was a combined bid formed after the initial bids all fell short.

The new BankUnited is acquiring 96 percent of the old BankUnited’s deposits and 99 percent of its assets, with the FDIC providing a substantial degree of loss protection on most of the assets.

The failure of the old BankUnited has been attributed by observers to a pattern of high-risk real estate lending in a declining Florida economy. The bank acknowledged in a regulatory filing this month that its accounting controls were not adequate and that it was having trouble determining the value of some of its assets.

Most bank seizures are conducted on Fridays, allowing the weekend to fix any technical glitches that come up, but with some larger banks, the FDIC seems to prefer not to take the risk of waiting until Friday, and so the BankUnited closure tonight was not unexpected.

Predatory Marketing to Credit Card Customers? An Insider’s View

The credit card reform bill Congress passed yesterday includes a little-noticed amendment that directs the GAO, the Government Accountability Office, to study the way banks market products to credit card customers. Sen. Herb Kohl, who offered the amendment, is especially concerned about “predatory practices and marketing” in the way banks offer “insurance” plans to cardholders, but if the GAO looks into this, it will find that banks’ practices in this area go far beyond that.

I know about this because I have spent years on the inside of the banking industry working on banking customer data. Banks constantly scour their customer base for any marketing angle they find that will let them sell something extra. Banking is a highly competitive business, and the larger banks are so expensive to operate that they have to find some kind of edge just to make a profit and stay in business. And that is especially true when it comes to credit cards.

What I think the GAO will find is that for banks, squeezing more money out of their customers is automatic. And when I say “automatic,” I don’t mean, “It’s in their blood, they can’t help themselves.” I mean, “The machines do most of the work, and there might not be any person at a bank who fully understands what’s going on in their marketing process.”

Banks don’t just sell the questionable “insurance” to gullible cardholders — they sell all kinds of things. They sell books and business equipment, supposedly at deep discounts, but actually at markups that bookstores and office suppliers would envy. They created the airline miles cards so they could target customers with travel-related offers. For years, the largest credit card issuers were advertising their identity-theft services on television. In the back rooms, they were making decisions that ensured that the identity theft racket would keep going so that they could continue to sell their services. Banks make a profit on many of the items they sell, but their real purpose in selling these items is to boost the balances of the credit card accounts, so that customers will be paying interest on their accounts for a longer time.

Is this predatory? I can’t answer that, but what I can tell you is that there is no field in the database that measures the extent to which a bank is taking advantage of its customers.

I worked for years in this side of banking, and it is hard to explain how far removed from reality the work was. I didn’t know who the customers were. It’s not just that I didn’t meet them — for security reasons, I never even saw their names. I also didn’t know what the “products” were. Nevertheless, I was doing statistics on them, and when one statistic in particular, known as “R-squared,” was a large enough number, it could almost automatically lead to 50,000 inserts being printed and mailed to all the customers in a particular demographic segment.

I would argue that there is no predatory intent in this kind of operation, but at the same time, there are no mechanisms in place to identify or stop actions that are predatory in their effect. Corporations don’t have a conscience. When a corporation measures how well its departments are doing according to how much profit each department generates, and it is almost legally obligated to do so, it is impossible for the departments to engage in the kind of self-criticism necessary to prevent a corporation from doing harm.

Let me give you a specific example. Banks commonly advertise products to cardholders whose balances are already so high that accepting the offer would lead the bank to charge the cardholder an over-limit fee. Banks say this is an accident, that they have no way of knowing what the customer balance will be when they prepare these offers two or three months in advance. Yet one of the reasons they expect to make a profit making that offer to that customer is that similar customers have been charged over-limit fees after being sent that particular offer. When you look at scenarios like this, you say the banks could be doing better at controlling their marketing activities.

And when the GAO looks into this, I believe that they will find multiple problems in the way banks sell products to cardholders. The reforms Congress just passed will help in a small way, but there is plenty of room for further Congressional action.

Wednesday, May 20, 2009

Collapse of the Credit Card

Last week’s announcement by Advanta that it was getting out of the credit card business on June 10 was more than it appeared on the surface. To cardholders, it might have looked like a credit company running away from potential losses as the economy deteriorates. But on closer inspection, Advanta was forced out of the credit card business when it lost the confidence of investors, mostly pension funds and hedge funds. And the same thing could happen to the largest credit card issuers as soon as a year from now. At the same time, the whole credit card industry is in rapid decline.

The credit card situation defies the usual intuition about economics. If cardholders are getting shafted, the banks must be making a fortune, right? Not exactly. Advanta’s small-business credit card business was struggling by the end of last year, and deteriorated rapidly in the first quarter of this year as 13 percent of customers, small businesses, failed to make payments on their accounts. Finally, its securitization trust, which it uses to sell its credit-card debt to investors, failed. At that point, Advanta had to choose between bailing out the securitization trust and turning it over to investors. The former choice would have left it penniless; the latter leaves it with no mechanism to fund its future credit card transactions. The securitization trust shuts down June 10, so that is the last day Advanta cardholders can use their credit cards. And then Advanta will have no more income, but at least it may avoid bankruptcy if enough cardholders pay off their balances over the next few months.

Advanta may have accelerated the decline of its credit card portfolio by changes in terms that alienated cardholders, but the giant credit card issuers haven’t exactly been friendly to their customers in the past two years either. And other banks depend in the same way on securitization trusts. Bank of America and Citigroup have been forced to bail out their securitization trusts this year, but might not be able to do so again at this time next year as the economy declines and unemployment rises. Rising unemployment historically has led to higher default rates on credit cards, the exact problem that killed Advanta’s credit card portfolio.

The Federal Reserve’s new rules on credit cards, ironically, may not go into effect until after the industry is already well on its way to collapse. The relatively modest Federal Reserve rule changes are scheduled to be in effect next July, and the Senate has approved a package of reforms that could move that up to February, while also tightening rules about credit for cardholders under 18. At the rate consumers are moving away from credit cards and banks are canceling accounts, though, the credit card business could be a third smaller by then. As I noted two weeks ago, credit card transactions are falling so rapidly that the debit card business surpassed it around the beginning of this year. It is a trend that Advanta’s failure will accelerate. As many as a third of Advanta’s credit card customers may not be able to get replacement cards from other banks.

Regardless of the details of any credit card reform, the New York Times says banks are planning to boost transaction fees and reinstate account maintenance fees on most credit cards. The Times quotes one banking industry figure describing the one third of cardholders who don’t pay any fees in a given year as freeloaders: “Despite all the terrible things that have been said, you’re making out like a bandit.” For those cardholders who do pay fees, the fees on credit card accounts (not including interest charges) are estimated to exceed $20 billion this year.

But as banks impose new annual or monthly fees on credit card accounts, consumers’ instinctive reaction is likely to be to close most of the accounts. The number of active credit card accounts could fall by more than half from that effect alone — and that’s before you look at what could happen if one of the biggest credit card banks or its securitization trust failed.

Businesses need to adapt to the changing payment environment. I can’t imagine there are many businesses left that assume everyone has a credit card, but if there are, they will have to come up with a workable alternative for those customers who lose their credit card accounts.

As credit cards decline, banks may relinquish the central position they have held in the credit card business. The transaction processing side of the business remains profitable, and it may have to find a way around the banks as the banks continue to pull out of credit cards, so that consumers can continue to make card purchases.

The bigger concern, though, is what will happen to the economy. Credit card spending is what has led the U.S. economy out of all of its recessions in the past 25 years. As confidence returns toward the end of a recession, consumers spend more freely on credit cards, and this is what gets the economy moving again. The decline of credit cards dampens the hope of an early recovery from the current recession. What will happen to the economy when confidence returns, but the credit cards are no longer there?

Tuesday, May 19, 2009

All-or-Nothing: The Republican Party and the Tamil Tigers

It might seem like a stretch to compare the Republican Party to the Tamil Tigers. But the comparison is more instructive than you would think.

The Tamil Tigers spent 33 years trying to overthrow the government of the island nation of Sri Lanka by mostly military means. The self-styled revolution is in disarray and appears to have been defeated more by its own inflexible, all-or-nothing thinking than by military firepower.

The Republican Party is attempting to take over the United States by political rather than military means, but you cannot always tell that by its words and actions. It speaks of a culture war, promises revolution, and lately threatens secession and calls for overturning the constitution. Its emphasis on the importance of weapons has led its members to be, in a few states at least, better armed than the combined police and military presence. Yet the mountain of weaponry, combined with the Republican rhetoric that frequently verges on the paramilitary, has done little to help the party win the hearts of voters.

Like the Tigers, the Republicans find a base of at least grudging support across about half of the country’s territory, yet they are not popular in any center of population. Squarely at odds with their nation’s traditions and cultural norms, they are driven to take over the government and use it as a tool to force cultural and institutional change, yet they lack the energy to do so.

Most of all, the Republicans, like the Tigers, lack the support of the people they are seeking to change — exactly the reason why they seek control of the government, to use the force of law to change the country. Any group that sees itself as a popular revolution first has to imagine that it is popular. The Tigers, quite mistakenly, saw themselves as representing the will of the people. They ultimately failed because the strategy of revolution cannot work if the people do not allow it. If you want to force a whole country to change against its will, the action you are undertaking is not a revolution, but an invasion, and the scale of effort and firepower required is quite different.

The Republicans are making the same mistake. They look at their 19 percent support in recent polls and fantasize that an additional 50 percent secretly support their plans. Yet the active support for the Republican culture war could not be higher than about 3 percent. Republicans seem to have persuaded themselves that they represent the traditional American point of view, yet their current ideas have come together only within the last five years, and such cornerstones as “family values” are inventions that trace their roots back only to the 1970s. The “traditional” values they seek to implement would lead most Americans to say, “You really mean that? You’ve got to be kidding.”

A revolutionary group, as the new Republican Party styles itself, can hope to rise to prominence by latching on to popular ideas as they come along, but that takes flexibility, and the Republicans are becoming increasingly intolerant and intransigent, to the point of forcing elected officials out of the party. In their dogged determination to implement the ideas they already have, the Republicans missed the chance to co-opt the core ideas of the tea bag movement of a month ago, a failure that speak volumes.

Too inflexible to engage in the conversation of American culture, too unpopular to mount an actual revolution, too old and tired to mount a full-scale invasion, the Republicans can only fall back on the usual approach of would-be revolutionaries, that of talking a good story. Based largely on the quality of the Republican story, the news media continues to treat the Republican Party as a major party, and I see no indication that this media presence will go away anytime soon.

Still, the Republican Party no longer represents mainstream politics and no longer participates in the major policy discussions of the United States. If Republican leaders cannot regain their political flexibility, reporters seeking to cover the actual workings of the political process will eventually have to move on.

Monday, May 18, 2009

Good Knowledge Gone Bad

A few days ago I wrote about time and knowledge. I thought that the “storehouse” metaphor for knowledge was leading us astray and that we could use knowledge better if we would select quicker metaphors, metaphors such as a “sprinkling” that reflect the way we may access knowledge and act on it within a matter of seconds, after which we may be free to forget the knowledge we have just used.

I failed to mention another, perhaps more urgent reason why the storehouse metaphor for knowledge and the long-term approach it implies for learning and using knowledge is a problem. Much of what we think we know is no longer true. It is obsolete knowledge, or what Alvin and Heidi Toffler call obsoledge in their book Revolutionary Wealth. Obviously, the more time that has passed since knowledge was collected, the greater the chance that the knowledge is no longer correct.

This is something I experience when I look in the world atlas. The atlas I use was drawn up in 1994 but not printed until 1995, which means some of the place names it shows had changed even before it was printed. When I look at the atlas, I refer to my mental list of changes that have taken place in the world, but my knowledge in this area is not only incomplete — it too is out of date.

You might think that getting information online would get you up-to-the-minute information, but often that’s not the case. The prior name for the street I live on was officially discontinued in the 1950s, but it continued to be shown on Google Maps until just last month.

You’re asking for trouble when you try to reach agreement between people whose knowledge is obsolete and people who have a more current, if less complete, view of the situation. Add in the fact that many of the leaders in business and politics are men of advanced age who possess a great deal of obsolete knowledge, and you assure that these disputes will continue to drag on the economy for years to come.

As the Tofflers point out, one particularly troubling area in which this conflict occurs is in health care. Much of what doctors know is half a century out of date. Some of a doctor’s knowledge could be based on a medical textbook written in 1970 based on scientific study from 1950. But a patient can often discover the latest scientific thinking on a health subject, information that may not make it into the medical textbooks for another 15 years, with just a day or two of digging online. The patient may misunderstand the significance of much of this information, yet the doctor may not have time to sort through it. In the end, it’s understandable if patients resist or ignore medical advice grounded in scientific thinking from the previous century, while doctors worry that patients are not taking their recommendations seriously.

As long as knowledge degrades with the passage of time, any storehouse of knowledge is at risk. If you think of knowledge as being carved in stone, it’s not so easy to change your perspective and start thinking of it as being carved in pumpkins, perhaps, and this is one reason why so many successful businesses decline so quickly after reaching the peak of success. In the coming years, we will continue to see established businesses fall apart after the knowledge they have come to rely on goes bad.

Sunday, May 17, 2009

Marathon Motivation

I ran a marathon this morning for the sixth time in as many years. As late as the halfway point I had my doubts about whether I would make it to the finish line, but I kept going and, in the end, got there almost the way I had planned it.

A marathon packs a full day’s work into a Sunday morning, and some employers must wonder how they might get workers to put the same effort and determination into an ordinary day of work. But employers will never be able to do this, and the reason is simple: there is no finish line in business. Managers are always moving the finish line, and in the rare instance that a worker makes it to the finish line before the employer gets a chance to move it, the response is not a medal, but a list of things that could have been done better.

The result is that employees can never approach any business goal with the same confidence with which they approach the finish line of a race. I saw this effect in the race today, when I saw a runner who was suddenly not sure he was going in the right direction on the complicated marathon course. He decided to keep going that way, but I saw him slow down by at least 10 percent over the next several blocks until it was confirmed that we were all still on the official course. When people don’t know whether they’re going toward the finish, it’s just impossible to go all out. Even if they decide to they can’t really do it.

The finish line of a marathon is announced long in advance, and once the race is started, it can’t be moved. By contrast, business leaders and managers are constantly moving the finish line of everything they want to accomplish. They can’t help themselves. It’s the nature of someone who wants to run a business to want to make things better all the time.

The secret of transferring marathon motivation to business is as simple as it is impracticable: persuade the business managers to stay out of the way. That means letting workers accomplish things outside the usual chain of management control. Lots of businesses claim to encourage this, but when push comes to shove, they decide they really do want the managers in charge of everything.

Saturday, May 16, 2009

1.77 Meters

The Catlin Arctic Survey ended safely on Wednesday, but the ice the team measured on the Arctic Ocean was so thin that this may be the last expedition of its kind ever attempted.

Scientists know from satellite images that the Arctic Ocean is a combination of first-year ice, which froze just last October and November, and multi-year ice, which has remained frozen for two winters or longer. Yet the three scientists trekking across the Arctic Ocean, measuring ice thickness and density by drilling holes through it, found first-year ice all along the way.

The average ice thickness the team measured was 1.77 meters. That thickness is similar to the height of an average adult and consistent with what is expected of first-year ice. It is also a little too thin for comfort — as navigator Ann Daniels put it, “You never know who’s going to go through.” On the open ocean, explorers have traditionally felt safer on ice that is at least two meters thick.

It may be that there was almost no second-year ice along the expedition’s route across what was supposed to be some of the thickest ice on the open ocean. Perhaps warmer water temperatures or lighter snowfall are making it difficult for second-year ice to grow thicker than first-year ice. Either way, the measurements confirm what scientists already supposed about the rapid thinning of Arctic ice since the 1970s. It’s a trend that has accelerated in the last two years, raising the prospect that the remaining Arctic ice cover could disintegrate any summer, and almost surely within five years, as soon as the weather is unusually warm or stormy.

Ice is expected to hold out longer in an area north of Greenland and Ellesmere Island, where it has a chance to stay anchored to a frozen shoreline, but as the ice gets thinner, even that depends on the wind. As soon as the wind changes direction in late summer, that ice too would scatter.

The ice melt has followed a normal pattern so far this spring, but ice melt in May mostly clears out sub-Arctic locations such as the Baltic Sea and the Sea of Okhotsk, so it isn’t a good predictor of what may happen on the Arctic Ocean during the summer months. Thin ice melts faster, and the ice on the Arctic is the thinnest we have ever seen in springtime.

Friday, May 15, 2009

This Week in Bank Failures

Credit unions are not so safe after all. The credit union that failed tonight, Rouge Employees Credit Union, looked like a perfectly ordinary credit union, aside from the economic risks associated with its location in Dearborn, Michigan. It had 6,200 members and $23 million in assets.

The National Credit Union Administration (NCUA) handled the failure in much the same manner as a routine bank failure, by arranging a purchase and assumption. Chief Financial Federal Credit Union of nearby Pontiac, Michigan, purchased the assets and took custody of the accounts of the failed credit union. The former members of the failed credit union will have uninterrupted access to their accounts. With this transaction, Chief Financial FCU’s membership has become almost 50 percent larger.

In South Florida, BankUnited reportedly now has three bids, but all three bids are considered likely to fall short, and the deadline for bids has been extended again in the hope of attracting at least one valid bid. BankUnited’s financial results are not likely to encourage bidders, however. The bank, which has a troubling net worth below zero, also paid more in interest on deposits than it received in interest on loans in the first quarter, a circumstance that virtually ensures a stiff operating loss for a bank, no matter how well it is managed. Interest rates on loans are much higher than interest rates on deposits, so the results would seem to indicate that a significant fraction of BankUnited borrowers are not making payments on their loans. That is a financial difficulty that would seem to prevent any existing bank from buying BankUnited intact.

Thursday, May 14, 2009

Could Saturn Outlive GM?

In one of the biggest ironies of the General Motors saga, it is beginning to look as if Saturn could outlive its parent company. GM shut down the Saturn factory five years ago, pulling the rug out from under the Saturn brand image of manufacturing quality. In February, GM listed Saturn as one of several nameplates it was likely to discontinue. Yet the good vibes left over from the old Saturn might be enough to keep the company alive.

The most likely scenario being floated now is that a group of Saturn dealers, working together with another buyer from within the auto industry, could buy Saturn and use its name and distribution network to sell cars made by another manufacturer. No specific automaker has been named, but these days, any major automaker would have enough excess factory capacity to supply Saturn with cars, and it wouldn’t take anything special to make cars that mimic the style and form factor of the original Saturn models, and attach a Saturn nameplate.

Saturn dealers are looking to arrange this because many of the Saturn dealers are nicely profitable. Yes, Saturn sales are down about 60 percent from their peak, but because Saturn has a rational distribution network, this isn’t the crisis that it is at the other GM divisions. A few Saturn dealers have closed, but most remain profitable. And these days, if you have a way to sell something to the public at a profit, it makes sense to find a way to keep that going. Saturn the company has been losing money, but it ought to be profitable too, once freed from its GM manufacturing obligations.

Meanwhile, the prospects for GM keep declining along with the world economy. Regardless of how General Motors accomplishes its restructuring this summer, it needs a rebound in sales to keep its factories going, and that rebound does not appear to be on its way.

Wednesday, May 13, 2009

A Sprinkling of Knowledge

The nature of knowledge is changing before our eyes, yet we are having trouble seeing the change because of the metaphor we use for knowledge.

The strongest metaphor for knowledge in Western thought is a storehouse. In ancient Egypt, a good storehouse was essential for survival, and advanced knowledge in fields such as astrology and geometry made civilization possible, so probably that is where the idea of a storehouse of knowledge was created. The metaphor has been eagerly promoted by schoolmasters who encouraged students to work hard, presumably carrying boxes and crates of knowledge into their personal storehouses. Eventually, a student’s storehouse would be full, at which point they could graduate (assuming they didn’t keel over from the effort first), and then they could start to make some practical use of their accumulation of knowledge.

The storehouse is a good working metaphor for knowledge, but it emphasizes qualities of knowledge that do not always hold true. In particular, it suggests that gaining knowledge is a laborious, large-scale process, and that knowledge might be retained for a very long time before it is used. And when it comes to knowledge, the more, the better.

Sometimes all that is true. But often, especially in recent years, the opposite is true. I can easily think of situations in which I gained knowledge quickly and easily and used it immediately, with no need to learn it comprehensively or retain it for later.

  • When writing a computer program, I wanted to use a framework I had never used before. All I had to do was mimic the way someone else had used that framework. It took only minutes to find good examples to copy, in books and online.
  • I assembled the desk I am writing at now in a step-by-step process of about 20 steps. The desk came with assembly instructions and I followed them one step at a time, with no need to understand or remember the process as a whole.
  • A few years ago I took a dance exercise class. I never had to study the advanced choreography we were doing because the instructor called out the movements as we went along.
  • Last year when I drove to Nashville for voice instruction I didn’t pay much attention to how I would get there. A simple one-minute query on a web site gave me a single page of instructions which were sufficient to tell me where to drive.
  • When I decided to buy a camera, I didn’t know the state of camera technology or the right place to buy a camera. It took me only an hour or so to find out enough to make an informed purchase. There wasn’t much point in remembering what I had learned in that process — cameras are changing so rapidly that the information I used is mostly obsolete already.

In these and countless other scenarios, knowledge is being used, but the focus is on a pattern of action. There is just enough knowledge at just the right time for the action to take place. It doesn’t fit the storehouse model of knowledge at all — knowledge was gained with no particular effort and retained only for a few moments or a few days.

Much of the knowledge we use fits this pattern. It is cheap, easily accessible, almost an afterthought, much like the salt in a salt shaker. And this will be even more true in the future as more of the barriers to knowledge are overcome, and access to knowledge is made even more quick and effortless than it is already.

Why clutter up your storehouse of knowledge when, in most situations, a sprinkling of knowledge will do? It’s a question that has profound implications for the future shape of the economy, not the least of which has to do with the role of experts. The economy in recent decades has been run largely by experts, who command high salaries for their expertise, but as knowledge becomes cheaper, it will get harder and harder to draw the distinction between the experts and the dilettantes. So what will happen then?

Tuesday, May 12, 2009

American Money

There is a glimpse of money in the music video below, and it says something about the perceived value of money. (If you’re in a hurry, just watch the segment from 0:49 to 0:54.)

This is a Russian band, singing in Russian to a mostly European audience, yet when the video shows money, it’s U.S. currency. My guess is that the reasons t.a.t.u. are showing American money in this particular video are:

  1. When it comes to the physical form of money, the U.S. $100 bill is still the ultimate.
  2. In popular culture, U.S. money is the most closely associated with the kind of mindless materialism depicted in the beginning sequence of the video.

It is good to use money well, but money also has a basic appeal quite independent of that. This is a very small point in the story of the “Snegopady” music video, but it reinforces the larger points that the video makes.

Monday, May 11, 2009

3 Days a Week

The U.S. Postal Service’s annual postage increase takes effect today, but the increase will not be enough to make the postal budget work. The problem is the volume of mail.

In the past, mail volume only went up, but with electronic communication gaining, mail had to decline eventually. After it reached a peak around November 2007, it seems as if the decline is hitting all at once. With personal letters moving to social network web sites, bills going out and being paid on company web sites, postage rates for parcels now too high to ship most things that used to be sold online, and advertising budgets being cut, the volume of mail has fallen about 19 percent from its peak. And with postage rates going up again (and BMG Music Service shutting down), mail volume is certain to fall farther between now and next year.

To cut costs, the USPS is considering cutting back on mail delivery from six days a week to five. But with technological trends working against the mail, I would urge it to consider a much bigger cutback, to three days a week.

Perhaps that’s easy for me to say. My mailbox is empty at least once a week as it is, now that banks are not sending out so many credit card offers. But really, what do you get in the mail that couldn’t wait until the next day?

Besides, with five delivery days, more than half of the mail that matters is delivered on Monday, or Tuesday if Monday is a holiday. It’s just advertising circulars and dribs and drabs for the rest of the week anyway, so there isn’t that much delivery lost by cutting back on that part of the week.

Cutting back on delivery is not enough by itself to balance the postal budget, but it would help. Just continuing to raise postage rates won’t get it done, and the postal service’s plans to raise mail volume by advertising more are, in a word, sad. We have to start figuring out where mail fits in in a world where it is no longer the primary way to reach most people. I am certain there is a place for it, but that place might be smaller than in the past.

Sunday, May 10, 2009

A Coating of Paint

Art student Sara Watson recently demonstrated the power of paint by painting a car to disappear into the surrounding parking lot. See it at BBC:

Art student’s car vanishing act

Much of what we see is paint, of course, or other things equally insubstantial: veneer, chrome, ink, paper, summer clothes — a visual surface made just heavy enough to hold together. For that matter, we may spend hours a day looking at things that are insubstantial and ephemeral, the fleeting images of film, television, computer, stage. It is not things’ physical weight that makes them real to us, but their spiritual weight.

Saturday, May 9, 2009

Inventories Pile Up

Inventories are piling up, a sign that the economy is nowhere near a bottom. It is not that inventories are growing larger, but that they are not shrinking nearly as fast as sales are.

The U.S. Census Bureau is reporting wholesale sales falling 2.4 percent in March, while wholesale inventories fell only 1.6 percent. Compared to the year before, sales are down 18.1 percent, but inventories down only 3.5 percent. This means wholesalers are holding merchandise longer before they sell it.

Ordinarily this would mean wholesalers’ operations have become more expensive, but as interest rates have also fallen since last year, the lower interest payments may make up for the longer period of time that merchandise stays at the wholesale level. Still, wholesalers will be looking to streamline their operations by cutting back their inventories to the levels they actually need, and this will mean less work for factories and importers in the next couple of months.

Friday, May 8, 2009

This Week in Bank Failures

Last weekend, according to published reports, the FDIC and OTS gave BankUnited a two-week extension in the hope of attracting more bids for the bank. There were reportedly two bids, but banking regulators and the Treasury were not expected to chip in enough money to make either offer work. So far there has been no word from regulators, bidders, or the bank itself. BankUnited held what must have been an eerie stockholder’s meeting on Monday morning. Stockholders went to the hastily scheduled meeting at a hotel near the bank’s Coral Gables, Florida, headquarters, hoping to vote on a takeover proposal. Instead, they just elected a board of directors before the meeting was recessed, to reconvene on May 22. Only two new directors were elected, and they were executives of the bank.

Some observers cite the two-week delay as evidence that the FDIC is rapidly running out of money. I am not particularly worried about this, however, as the House of Representatives has signaled its willingness to consider emergency legislation to fund the FDIC if needed. A shutdown of BankUnited could require the FDIC to send out checks for $8 billion in deposits, although most of that money would be recovered later with the sale of the bank’s assets. If a suitable buyer can be found for the bank, though, a structured takeover could save the FDIC as much as $1 billion.

The Supervisory Capital Assessment Program, or stress test, was intended to assess the capital position of the 19 largest banks in the United States, and its results were officially released yesterday. When you get past the back-slapping and high-fiving going on in the banking industry, what the report shows is that if the economy goes downhill, half the banking system is going down with it. It is not really much reassurance to read that most of the major banks will make it through this year provided that the economy improves significantly between now and the fall. But if real estate values fall, unemployment goes higher, and household income continues its decline, at least 12 of the 19 banks will be looking for help. As one banker noted, this was a test that IndyMac and Fannie Mae would have passed. Hours after the stress test report, Fannie Mae reported that it is on its last legs and could collapse within weeks because of loan losses. Also, AIG reported a $4 billion quarterly loss that was almost identical to the company’s remaining market value (though nevertheless its smallest loss in over a year).

Anticipating more bank failures in Georgia and Florida and elsewhere along the east coast, the FDIC announced a satellite office in Jacksonville, Florida. The FDIC says it will set up shop in its new Jacksonville office in September. It might occupy the office for five years or so.

The FDIC had only one bank failure to manage tonight, and on the west coast. Westsound Bank failed, and its nine offices around Bremerton, Washington, and in the area generally west of the Puget Sound, will become branches of Kitsap Bank, a larger bank in the area. Kitsap Bank is taking over the failed bank’s $300 million in deposits and is purchasing 15% of its assets. The FDIC estimates a cost over $100 million on the other assets.

In closing Westsound Bank, the Washington Department of Financial Institutions cited its “very poor lending practices during the past several years.” It praised the bank’s current management team but said it was not enough to overcome the bank’s past mistakes.

Westsound Bank had been operating under a cease-and-desist order since last March, and reported 39 percent of its loan portfolio as nonperforming at the end of last year. Many of the problem loans were for high-end residential construction under a program led by Countrywide Financial, a program that was withdrawn after regulators took a close look at it. Countrywide Financial had losses of its own that led it to be acquired by Bank of America a year ago.

Thursday, May 7, 2009

If You Lose Your Job, You’re Screwed

This is an exercise in reading the fine print of a bank’s credit card terms. I won’t name the bank, as its new terms are more favorable to the cardholder than you will find at most major banks. Yet they are still scary enough to make you say, “I think I’ll use my debit card instead!”

These terms came in an 18-page pamphlet with more than 600 words per page, giving it a word count near 11,000 words. I have read novels shorter than that. The fine print, arcane language, and considerable length don’t really encourage you to read the whole thing, but if you do, your reward is to discover things like this. On page 12, under the heading “DEFAULT” you see the bank’s list of things that might happen that would lead the bank to conclude that you had not lived up to your side of the agreement. These include:

We do not receive a required Minimum Payment Due . . . on the payment due date . . .

You exceed the credit limit.

We have reasonable cause to believe you will not be able to repay us . . . for any reason, including but not limited to notice that you have become unemployed.

You die, become imprisoned, are declared legally incompetent . . .

And it goes on for five more paragraphs. But let’s focus for the moment on the key word “unemployed.” This just means you lose your job. And the way it’s written, it might include quitting your job to take another job, if you take one day off between the two jobs. To the bank, this is the same as if you die or go to jail.

What happens then? The bank can cancel your card and demand immediate payment of your entire balance:

In the event of default, we may terminate your Account as provided in Section 7 below, accelerate the unpaid balance and commence collection activity.

If you lose your job, you’re screwed. It’s not just that the bank might decline your credit card purchases — it’s worse than that. If the bank finds out, or even if it reasonably believes you have lost your job whether that actually happened or not, it can demand that you pay back all the money you owe it that same day. There is no question about this if you read what it says in section 7, which includes this:

If you are in default, we may close your account and require you to pay us immediately the entire amount you owe under this Agreement, in full.

And don’t even think about saying, “What do you mean? Where am I supposed to come up with $3,000 today? Can’t you wait till I get my paycheck on Friday?” If you don’t pay right away, the bank can sue you and then you will be obligated to pay its lawyer:

We may refer any past due amounts you owe under this Agreement to a collection agency or lawyer for collection, in which case you agree to pay us our reasonable costs of collection, including without limitation collection agency fees, court costs and attorneys’ fees actually incurred by us, to the fullest extent permitted by applicable law.

You can’t control when you might lose your job, so the only way to protect yourself from this scenario is to have money on hand, enough to cover the full amount you owe on the credit card at any moment so that you can send it to the bank immediately whenever it might ask for it. Of course, if you can do that, then what is the point of the credit card? If you have to have the money before you can spend it, isn’t it just as easy to use a debit card?

The credit card terms I’m quoting here might seem harsh, but most banks have stricter terms than this. Some of the largest banks include a “universal default” provision, under which they will change your interest rate, and potentially put your account into collection, if the bank thinks you are late in paying back your mom.

Part of the appeal of credit cards in decades past was that it was a relatively safe way to borrow money. You could spend money several weeks before you had earned it. But the fine print that goes with credit cards has changed. Legally speaking, in 2009, it is not safe to owe money on a credit card. Owing money to a bank on a credit card account is not necessarily safer than owing money to a loan shark because in either case, the amount of money you owe, the interest rate you have to pay, and the date when the payment is due depend on the lender’s opinion of you.

That is not a good position to put yourself in. And the credit card reforms that Democrats in Congress are considering, and Republicans are opposing, are really quite timid and won’t change much about this. It probably shouldn’t be permitted in a contract for so much to depend on one party’s opinion of the financial condition of the other party, but the law does seem to allow that, and as long as credit card terms are written this way, spending ahead on a credit card is a calculated risk that most of us are better off not taking.

Wednesday, May 6, 2009

Mexico City’s 5-Day Shutdown Defeats Flu

Mexico is slowly getting back to normal after a shutdown that appears to have succeeded in halting the momentum of the flu there. The number of new cases in Mexico dropped sharply during the shutdown, to the point where the United States is now the center of the new flu outbreak.

The shutdown was done at a tremendous economic cost, yet it may have been worthwhile. Telling people to stay home for five days, a move that even included canceling yesterday’s Cinco de Mayo celebrations, prevented thousands of people from catching the flu, and could have bought enough time to prevent the flu from becoming a large-scale outbreak within the city. As the infection continues to spread across the United States and Europe, it is a fair guess that it would have continued to spread across Mexico City if the shutdown had not been ordered. If so, it appears that the benefits of the shutdown were greater than its costs.

The World Health Organization (WHO) confirms cases in at least 21 countries, with quite a few cases contracted outside of North America. If it finds a pattern of people catching the new factory farm-based form of H1N1 flu in public places on multiple continents, it will declare a pandemic. Last week I wrote about why I think it is harder to have a flu-like disease spread globally now, but I believe it is important to note that the factory farm flu has spread faster than other recent new flu outbreaks, so it is likely to spread much farther among humans than bird flu did, for example.

An encouraging note is that the flu has killed far fewer people in the last week, as people know to watch for it and to take it seriously if symptoms appear. But WHO cautions that flu mutates easily and could turn into a more harmful form in the coming weeks, so it encourages people to remain vigilant. As I have mentioned, the key to limiting the spread of flu seems to be washing hand-contact surfaces such as doorknobs and handrails in busy public places, and washing hands after passing through such places.

Tuesday, May 5, 2009

The Debit Card Habit and the Saving Rate

The 4 percent saving rate among U.S. consumers in February was not a fluke. The saving rate was basically the same, 4.2 percent, in March. Consumer saving surely went up in April too as many of the income tax refunds arrived. Last spring was when the saving spree got started, as people used their stimulus checks to pay down their credit cards.

In economic terms, paying off a loan and putting money into savings are equivalent. Either way, you’re using money you earn to boost your financial strength. And people are doing more of that these days. For years, the U.S. saving rate was near zero. The saving rate declined slightly a year ago as many people lost their jobs but tried to keep up their lifestyles. But now, the consumer mood is more sober, and people are saving to try to position themselves better for possible rough spots ahead.

There are several good reasons why people are saving this year, but the debit card habit might be the most important reason. Once you get in the habit of shopping with a debit card in place of a credit card, it is easier to control your spending, and therefore easier to save. And debit cards have become much more popular in the last two years.

Debit cards surpassed credit cards around the beginning of this year, according to results released last week by Visa and Mastercard. After half a century of increasing every year, the number of credit cards is actually declining now. Also declining: the number of active credit cards, the number of credit card transactions, and the dollar volume of credit card transactions. But debit card transactions are expanding almost fast enough to make up the difference.

A decade ago, some shoppers thought there was a stigma attached to using a debit card. Perhaps it meant that you did not qualify for a credit card. But if there was ever any stigma, it is gone now. Most consumers have at least one credit card and at least one debit card, but only the debit card proves you have money in the bank. Banks are cutting credit limits and imposing stiff new fees on credit card accounts, but you don’t have to worry about that if you use a debit card.

Many consumers find that shopping with a debit card makes spending more real to them. The money is out of your hands the moment you make the purchase, the same as if you paid with cash. The simplicity and finality of the debit card transaction is part of the debit card’s appeal.

This is something for economists to note as we look forward. Consumers may have switched to debit cards because of the recession, in part, but that does not mean they will switch back to credit cards when the recession is over. The debit card habit may last for decades. The pattern of saving that goes with it will last too. This has long-term implications for the economy. We already knew that the economy of the next decade would be driven more by income and less by borrowing. The debit card habit is another reason why this will happen.

Monday, May 4, 2009

Starting a New Job: 5 Quick Tips

With all the focus on the people who can’t find a job, it is easy to neglect the people who are starting a new job — more than a million this week in the United States. With jobs being more scarce than usual, it’s easy to be extra nervous about a new job, but you shouldn’t be, and here’s why: your new employer likely picked you out of a large pool of qualified candidates as the one most likely to do the job well. If you are about to start a new job, these ideas may help you get started:

  1. Don’t try to do everything on the first day. You might be anxious to show how productive you can be, but at the outset you have to focus first on access. This could include getting an ID card, keys, telephone, network accounts, and a parking sticker. The company may need your attention for several hours to get you signed up for health coverage or other employee benefits. Another focus on the first day is places — depending on the job, you may need to know where to find your boss, coat, desk, supplies, and conference rooms. In any new building you need to locate the rest rooms and exits, including emergency exits. It’s obvious enough that you can’t expect to do any work at all if pedestrian details such as these aren’t taken care of, but what may not be obvious is how much of your first day or week could be taken up with just getting in the door. Be patient.
  2. Be friendly when you meet people. At a new job, you’re likely to be introduced to far more people than you can remember. It is easier for them to remember you than for you to remember them, so smile and focus more on making a good impression than on remembering everyone’s story. Later, go back and reintroduce yourself to people at a more comfortable pace, perhaps one person per day.
  3. Don’t expect your new company to be the same as your old company. If you got laid off at your last job, look at it this way: a company that is hiring must be doing something better. Expect to learn the company’s way of doing things.
  4. Adjust your style. You probably won’t find out how people actually dress in your new work place until you get there, so start out with something clean, simple, and classic, and adjust your clothing style based on what you see as you go along.
  5. Put in an extra effort during the first few weeks to adjust to the new job, but don’t let the effort show. For example, if you hear that you’ll be working with databases all day in your new job, and you’re not sure you know what a database is, spend half an hour in the evening finding out the key ideas and terminology of databases. But try to avoid being seen putting in long hours in the office in your first few weeks, unless you want to continue working those hours for as long as you have the job.

If you’re on your way to your first day on the job and totally don’t know what to expect, here’s a list of things to take:

  • pen
  • small note pad or notebook that fits in your pocket
  • everything you know about where you’re going and who you’re supposed to meet first, including telephone numbers
  • a map if you will need it to find your way
  • calender (or at least know what day it is), because you could start scheduling meetings the minute you arrive
  • proof of identity (whatever cards or papers are needed to establish that you are legally entitled to be employed)
  • something that tells the time (this could be your cellular phone)

Finally, one of the best ways to make a good first impression on a new job is to show up on time. If you’re going to a new place, give yourself extra time to find it, find a parking space, find the right building, and so on. If you have already driven to your new workplace for an interview, consider that traffic patterns may be different during rush hour, and plan accordingly. Good luck!

Sunday, May 3, 2009

Saving When Interest Rates Fall

When interest rates go up, it gives people a greater incentive to save. Higher interest rates on loans make it more important to pay off a loan quickly, and higher interest rates on savings accounts give you an extra reason to put money in the bank. Yet this year, people are saving more because interest rates have gone down.

It’s not that mysterious, really. People who can reduce their mortgage rates can spend less every month on mortgage interest. They can pocket the extra money, use it to pay down their mortgage principal, or better yet, pay off any credit card balances.

This is a bigger trend in the United Kingdom than in the United States. U.K. mortgage rates have fallen significantly, and borrowers paid off a record £8 billion in mortgage principal in the fourth quarter of last year, according to a story in today’s Sunday Herald.

U.S. mortgage interest rates have fallen mainly for homeowners who have more than 25 percent home equity. Some people are using their newly reduced mortgage payments to pay off their car loans faster. Others are just making extra payments on the mortgage.

It’s a windfall for consumers who might end up paying off their mortgages three years sooner just because of the decline in rates. Yet it’s a frustration for central bankers. The Fed lowered interest rates to zero to try to get people to save less and borrow more so they can spend more, but in the short run, it is having the opposite effect. That is one reason extra government spending in this situation is helpful to the economy. The extra federal government spending this year seems huge, but it is not likely to be enough to counter the effect of the reduced spending by consumers, never mind the cutbacks in business and state government.

Saturday, May 2, 2009

The Outburst and Respect for Professional Nature

In a newly published interview with Total Film, Christian Bale attempts to explain The Outburst, his four-minute tirade against a technician during the filming of a movie scene. It’s become a symbol of Hollywood ego and pretension that will be remembered long after the sequel they were working on at the time (Terminator Salvation) has been forgotten. And, whether it’s intentional or not, Bale’s attempt at an explanation will only add to the legend.

Because when asked about it, instead of talking about his own actions, Bale went on at length about how hurt he was that his profanity-laced tirade was recorded: “I’m not making any excuses, but there is an essential trust . . . every sound guy says, ‘We are not only not recording, we are not even listening.’”

All of which is nonsense, of course. It not only goes against the way a movie production works — it is not the actors, but the directors, who direct the work of the film crew — but it shows a lack of respect for the professional nature of the people he was working with.

“Professional nature”? I just mean that when people have a certain level of dedication and involvement in their work, you have to expect them to perceive and respond to situations in a way that is consistent with that. You just can’t be surprised if a police officer breaks up an argument or a race car driver mentions how worn out the tires on your car are. You don’t spill your company’s secrets to a journalist and then act surprised when they are in the paper the next day. In the same way, “trusting” sound technicians not to record sound doesn’t make any sense, all the more so in a setting where everyone’s work is wasted unless the sound is recorded. It is like saying to an actor, “I thought I could trust you to stand still and not say anything!”

Granted, there was some kind of failure, or a series of failures, that led to that recording ending up in public seven months later, but that is not the result of the microphones being plugged in on the movie set. The microphones were plugged in for the same reason that the actor was there — in order to make the movie. Really, anywhere the microphones are on, it is only prudent to act accordingly, as more than a dozen politicians have discovered in the last couple of years.

As a matter of etiquette, it is good to pay attention to where people’s livelihood comes from so that, whenever that subject comes up, you can show a basic level of respect for work involved in it. One of the worst things you can do is to show that, in your mind, the work you do is all-important, and everyone else is just screwing around. And if you do that with an astonishing degree of clarity and emphasis — well, that’s why The Outburst is the stuff of legend.

Friday, May 1, 2009

This Week in Bank Failures

Bank of America executives must have known their bank was underwater before last year began. Otherwise, how do you explain the stock-swap deal in which Bank of America offered its own seemingly valuable stock in exchange for the seemingly worthless stock of Countrywide Financial? In retrospect, of course, Bank of America stock was not as valuable as Wall Street thought at the time, and stockholders have seen the market value of their shares decline by about three fourths since that deal closed. Bank of America is weighed down not just by losses at Countrywide Financial, but also within its own portfolio and at Merrill Lynch, which it tragically acquired at the end of the year.

It is that last deal that is getting the most scrutiny, and this week, it is easy to get the sense that we are watching the world’s largest bank unravel. CEO Ken Lewis, who has spent most of this year resisting investigations into the Merrill Lynch acquisition, lost his position as chairman of the board of directors this week after his angry defense of the deal at a Wednesday meeting of stockholders failed to persuade them to reelect him to that position. Today Congress is talking about possible hearings into the deal, which might resolve the contradictory statements various parties have made about the sequence of events. Bank of America’s position is likely to get more complicated next week when the Fed is expected to release results of the stress test it conducted in conjunction with the Treasury. According to published reports, the stress test for Bank of America showed that it does not have enough capital to get through next year even under the rosy economic scenarios used for the stress test.

The most troubling bank failure of the current recession occurred just after closing time this afternoon, when the OCC, the licensing authority for national banks, seized Silverton Bank, one of the largest correspondent banks in the United States. This failure is troubling both for its causes and its consequences.

As a correspondent bank, Silverton did not take deposits from the public, nor did it make consumer loans. Instead, its customers were banks, mainly in the southeastern and central states. It cleared checks, arranged loans between banks, and managed credit card operations for banks. However, between 2006 and 2008, at the same time that it took on the Silverton name and its national charter, Silverton started to make real estate loans, primarily to residential developers. The timing was poor, but Silverton was not so aggressive in its expansion, so that its real estate loan portfolio is not falling apart the way you might see at some banks that came late to the real estate boom.

The real estate lending couldn’t have helped Silverton’s fortunes, but its failure appears to be more closely tied to its primary business within the banking industry, particularly its involvement in loan participations. These are financial instruments that allow the income and risk of individual loans to be divided among several banks. Silverton was supposed to be primarily an intermediary in these arrangements, but with so many loans going bad for its bank customers, Silverton apparently ended up with more losses and expenses than it could handle for these loan participations.

This is what is most troubling about the Silverton story. If the loan participation costs were large enough to bring down Silverton, then they must also be having a profoundly negative impact on hundreds of Silverton’s bank customers that bought into the loan participations, along with those that originated the bad loans. To make matters worse, Silverton was mostly owned by these same banks, so its failure erases assets from the balance sheets of a large numbers of banks, reducing the capital levels for those banks.

The FDIC could not allow Silverton to shut down abruptly, as the uncertainty surrounding its outstanding loan participations and the disruption in credit card operations and check clearing could trigger failures at some of the banks that are Silverton’s customers. Nor could it realistically expect to find a buyer for a bank with no retail customers. Instead, the FDIC is forced to operate Silverton for now and probably until the recession is over. At that point, it may be able to sell or spin off a smaller version of Silverton.

Silverton was part of the real estate banking bubble, hugely profitable during the boom, then facing wrenching difficulties as soon as real estate values peaked. And being largely bank-owned, its success during the boom may have encouraged overexpansion by its bank owners. The trouble with overexpansion is that it leads to high expenses that make it hard for a bank, or any other business in this situation, to turn a profit.

Silverton had $4.1 billion in assets, and the FDIC is guessing its costs will be about a third of that amount.

Bank failure spread to New Jersey tonight, as Citizens Community Bank of Ridgewood, New Jersey, was closed. Its $44 million in deposits were transferred to North Jersey Community Bank. North Jersey Community Bank paid a small premium for the deposits and is also purchasing about a fourth of the failed bank’s assets.

Citizens Community Bank had only one office and should not be confused with the banks elsewhere in the state that use the same name. Its location in Ridgewood may have contributed to its decline. Ridgewood is a suburb barely 20 miles from Wall Street, and many of its residents lost their Wall Street jobs last year.

For North Jersey Community Bank, which already operates in the same suburban area, the new office is its seventh, and the expansion fits with its gung-ho commercial identity as “the fastest growing bank in New Jersey.”

In Utah, America West Bank was closed. America West Bank had offices in Layton, Ogden, and the Salt Lake City suburb of Murray, and a loan office at the opposite corner of the state in St. George. It is not associated with American West Bank, which is also located in the intermountain West, but farther north in Washington and Idaho, nor with the much larger WestAmerica Bank of California.

America West Bank is involved in a spectacular lawsuit, in which the chairman of the bank’s board of directors sued his own bank for $4 million in connection with an alleged embezzlement scheme by an employee of five of the chairman’s other companies, during a period when the employee also had a job at the bank. According to the Standard-Examiner, the suit alleges the employee “improperly diverted $558,441 from plaintiffs’ deposit accounts at the bank to her personal accounts,” yet no criminal complaint was ever filed, and the employee claims that none of this ever took place. There is no telling whether this lawsuit or the alleged management lapses helped to persuade the Utah Department of Financial Institutions to close the bank, but the closing took place just two weeks after the suit was filed. I am not even sure it is possible for the chairman of a corporation to sue his own corporation for management negligence, but this may be a moot question now.

America West Bank had $284 million in deposits, which have been transferred to Cache Valley Bank. Cache Valley Bank identifies itself as “a home-town bank” with its two offices both located on Main Street in Logan, Utah, a one-hour drive north of Layton and Ogden. In addition to the deposits, it is purchasing a small part of the failed bank’s assets.

There is suspense in South Florida after a deadline passed for BankUnited. The $8 billion thrift had discovered that its losses last year were worse than previously thought and its book value had become negative, a condition generally not seen or permitted in a bank. It had promised the Office of Thrift Supervision (OTS) to work out a deal to be sold to another bank by Wednesday, with the deal to be completed by next Monday, although the OTS could extend either deadline. There are reports of two parties preparing offers to buy, but the offers would likely request a degree of government help that the Treasury and FDIC would be reluctant to provide. Similar situations earlier in the year have led to banks being seized the following Friday, so people will be watching for that if Monday’s deadline passes without an announcement.